Factors Affecting Economic Growth in Developing Countries

Developing countries experience a wide range of challenges. They grapple with issues that affect their economic growth and always endeavor to improve their economies through thick and thin. The challenges they face are different compared to their developed counterparts. In this Essay, we will discuss the Factors Affecting Economic Growth in Developing Countries.

Firstly, developing economies largely depend on savings and investments. Capital goods present in a country matter a lot because they determine the quantity of consumer goods to produce at any given moment. When capital goods increase, this is investment. Growth only occurs when investments supersede depreciation. The higher this level is the more promising an economy is as there are more opportunities for growth. However, investments occur when there is source of resources. Developing countries therefore lag behind because there are limited resources for the people to invest.

Another factor that affects the economy of developing nations is related to macroeconomic stability of a country. These conditions are important as they create an environment for the economy to thrive. Thus, the ability of any economy depends on the stability of the economy itself. Macroeconomic stability is vital since it lowers investment risk. This is a prerequisite because investors prefer an environment that has minimal or no risks. For developing countries, macroeconomic stability is always lower compared to developed economies. In most cases, the investment risk is too high to allow investors to do business. As a result, the investors seek alternative business environments that have lower risks.
Lack of fiscal balance also affects the economy of developing countries. Normally, this balance reduces the inflation risk, as there will be limited chances of the government filling the market with printed money. It also stabilizes the exchange rate, as banks will charge reasonable rates for business loans to encourage investment. While this is the case in developed countries, developing economies grapple with high inflation and the risk of the government printing is always high. Here, the prices on the market fluctuate with huge and alarming margins. Oftentimes, when inflation checks in, money loses value and poverty creeps in. Investing in developing countries is sometimes discouraging because of high exchange and bank rates. These discourage both local and foreign investors.

Politics further affect developing countries. For example, when a country falls apart because of civil war, the economy suffers irredeemable losses. This is because no business can take place in a hostile environment. War and poor leadership repels investors from all direction. Additionally, skilled workforce may migrate to safer countries creating a shortage of skilled workers to drive the economy.

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